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The U.S. dollar staged a strong recovery overnight, reversing earlier weakness as concerns over trade tariffs resurfaced. The dollar index, which had dipped to 106.97, climbed back above the 108.00 level, fuelled by fresh protectionist rhetoric from former President Trump. His latest remarks signal a firm commitment to tariffs, dismissing the idea of a modest 2.5% global rate and instead advocating for significantly higher levies. Trump specifically targeted key sectors such as semiconductors, pharmaceuticals, and metals, while also hinting at imposing auto tariffs on Canada and Mexico. This reinforces the view that initial market relief over the absence of immediate tariff actions in his second term may have been premature.
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In addition to the trade concerns, on Tuesday (25/01/2025) a sharp sell-off in U.S. tech stocks added to market volatility. The Nasdaq dropped over 3%, led by a staggering 17% decline in Nvidia. The slump was triggered by reports of a new AI model from China’s DeepSeek, which appears to be more efficient and less dependent on Nvidia’s chips. While Nvidia sought to downplay the competitive threat, investor sentiment turned risk-averse, benefiting safe-haven currencies such as the Japanese yen and Swiss franc. USD/JPY briefly dropped to 153.72 before rebounding to the 156.00 range, fully retracing the initial move.
Looking ahead, the depth of the tech correction poses a downside risk to the dollar’s strength, particularly if market participants begin to reassess the sustainability of U.S. economic outperformance. Tech stocks, much like long-dollar positions, remain a crowded trade, and any unwinding could pressure the greenback.
Yen Volatility and BoJ Policy Considerations
The yen experienced a rollercoaster session, initially rallying on risk-off sentiment before surrendering gains. USD/JPY’s choppy price action reflects ongoing uncertainty surrounding the Bank of Japan’s policy trajectory. Governor Ueda’s hawkish tilt in the recent BoJ meeting supported expectations of further rate hikes, with market participants now eyeing a potential move in July. However, Japan’s domestic political landscape introduces a layer of complexity. With the Upper House elections set for late July, policymakers may be reluctant to tighten monetary conditions too close to the vote.
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Adding to the uncertainty, reports suggest Prime Minister Ishiba’s government is struggling to secure support for its annual budget, with opposition parties pushing for tax concessions and expanded social benefits. A failure to pass the budget could undermine Ishiba’s leadership, potentially delaying BoJ policy adjustments. For now, Japanese rate markets are pricing in only a modest chance of a May or June hike, with roughly 15 basis points of tightening expected by mid-year.
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